The Twentieth century may be remembered as the century of excess. In every area, more things were done in the Twentieth century than in any other century in history, and in many cases, more than in all previous centuries combined. The Twentieth century saw some of the most destructive wars in history, the development of the Atomic Bomb, the beginning of air and space travel, the colonization and decolonization of the Third World, the rise and fall of Communism, dramatic improvements in the standard of living, the population explosion, the rise of the computer, incredible advances in science and medicine, and hundreds of historically unprecedented changes. The Twentieth century also produced more inflation than any other century in history. Inflation is nothing new. Roman rulers produced inflation in Third Century Rome by debasing their coins, China suffered inflation in the fourteenth century when the Emperors replaced coins with paper money, Europe and the rest of the world suffered inflation when gold and silver started flowing into the Old World from the New World in the sixteenth century, and the French and American Revolutions destroyed currencies in each of those countries. Nevertheless, as we shall see, the Twentieth century produced the worst inflation in human history. Every single country in the world suffered worse inflation in the Twentieth century than in any century in history. So what caused this inflation to occur, and is further inflation in the Twenty-first century inevitable? The Nineteenth Century Amazingly enough, the Nineteenth century was a period of deflation, rather than inflation. From the end of the Napoleonic Wars in 1815 until the start of World War II in 1914, there was no inflation in most countries, and in many cases, prices were lower in 1914 than they had been in 1815. Prices fluctuated up and down from one decade to the next, but overall, prices remained stable. There were exceptions to this rule. The United States suffered inflation during the Civil War, though the United States also went through deflation after the war in order to bring the economy back onto a gold standard. The Confederate States suffered high inflation since they printed money to pay for the war. The eventual collapse of the Confederate States made their currency worthless. Countries were able to minimize the amount of inflation they suffered during the Nineteenth century because currencies were tied to commodities (gold and silver) whose supply increased at rates similar to the increase in output. Price stability in gold and silver produced price stability for the world. The Nineteenth century was a period of bimetallism. Countries chose to back their currency with either gold or silver. The United Kingdom was on the gold standard from the end of the Napoleonic Wars until 1914. Because the British economy grew faster than the supply of gold, prices fell in Britain during that hundred-year period. Other countries such as France, Russia, Austria, most of Asia, and other countries tied their © Global Financial Data. WHITE PAPER. All rights reserved. currency to silver. Since the supply of silver was growing faster than economic growth, countries on a silver standard had higher inflation rates than countries on the gold standard. Nevertheless, their inflation was modest by Twentieth century Standards. Still, other countries such as the United States, primarily for political reasons, tried to balance themselves between gold and silver by tying their currency to both metals, but in the end, gold triumphed. By the beginning of the Twentieth century, every major country in the world had tied its currency to gold. The result was a century of price and currency stability. The value of the US Dollar relative to the British Pound Sterling was the same in 1914 as it had been in 1830. Because currencies were tied to gold, fluctuations in exchange rates were minimal, rarely moving more than one percent above or below par. Given this situation, nothing could have prepared the world for the hyperinflations and persistent inflation of the Twentieth century. The purpose of this paper is to both document inflation in the Twentieth century, and to analyze what went wrong. Why will the Twentieth century be remembered as the century of the worst inflation in human history? How did the Twentieth century differ from the Nineteenth century? Which countries suffered the worst inflation, and why? Which countries suffered the least inflation, and why? And most importantly, will the Twenty-first century be another century of inflation? Or will the world enjoy a century of price and financial stability similar to what occurred during the Nineteenth century? Exchange Rates and Inflation It would have been easy to write this paper if every country had kept data on inflation throughout the Twentieth century. Unfortunately, this isn’t the case. Most countries only began keeping data on inflation after World War I, and for smaller countries, data often does not exist before World War II. Inflation data before these dates are often estimates based upon historical price data. Moreover, the worst inflationary periods often lack any inflationary data at all. It is easy to keep track of inflation when prices are rising at 2% per annum, but more difficult when prices are doubling on a daily basis. In order to compare inflation throughout the world, we have had to rely upon a proxy for inflation: exchange rates. The theory of Purchasing Power Parity says that in the long run, differences in inflation rates between countries are transmitted through changes in relative exchange rates. If prices double in one country but remain unchanged in another country, the currency of the inflating country will lose half of its value relative to the currency of the stable country. Otherwise, exports from the inflating country would become so expensive that foreigners could not afford to purchase their exports. For this reason, all inflation comparisons will be based upon exchange rate changes over time. © Global Financial Data. WHITE PAPER. All rights reserved. Inflation in the Twentieth Century The United Kingdom is the only country for which a complete Consumer Price inflation record is available for the entire Nineteenth century. Prices in the United Kingdom rose during the Napoleonic Wars, and started to decline after 1813, returning to stable pre-war levels by 1822. From 1822 until 1912, consumer prices showed no overall increase. There were periods of moderate inflation and deflation, but no overall inflationary trend. This general pattern holds true for other countries for which inflation data are available. The Twentieth century is quite another matter. Whereas the Nineteenth century went through periods of moderate inflation and deflation, the Twentieth century was a period of general continual inflation, with some periods worse than others. The only times in which prices fell were the periods right after World War I and the Depression of the 1930s. During all other periods, prices generally rose. The table below compares the inflation experiences of the United Kingdom and the United States between 1820 and 2000, providing both the index for each country and the annual inflation rates during the 20-year and 10-year periods that are covered. Several facts are immediately obvious. First, the lack of inflation in the Nineteenth century is clearly visible. Even in the United States during the 1860 to 1880 period when the Civil War occurred, the overall level of inflation was lower than in most of the post-World War II era. Second, both the United States and the United Kingdom had similar inflation experiences throughout the Nineteenth century. By contrast, not only was inflation higher in the Twentieth century in the United States and the United Kingdom, but it was also more variable, both within and between countries. Greater inflation in the United Kingdom in the 1910s led to greater deflation in the 1920s than in the United States. The same was not true after the war. The United Kingdom had greater inflation than in the United States in every decade after 1960. © Global Financial Data. WHITE PAPER. All rights reserved. The table can also show the merits of using Purchasing Power Parity to analyzing inflationary differences between countries. Whereas wholesale prices in the United States increased 14-fold in the Twentieth century, wholesale prices increased 53-fold in the United Kingdom. Prices rose 3.75 times faster in the United Kingdom than in the United States during the Twentieth century. This would predict that the British Pound should have depreciated from 4.85 Dollars to the Pound in 1900 to 1.30 Dollars to the Pound in 2000, which is not far from the current rate of about 1.45 Pounds to the Dollar. A Brief History of Inflation in the Twentieth Century The review of inflation in the United Kingdom and the United States showed that inflation varied from one decade to the next. Inflation in the Twentieth century can be divided into a number of © Global Financial Data. WHITE PAPER. All rights reserved. periods of deflation and inflation. Economic and political events were the primary factors that set the tone for each of these periods. We divide the inflationary experience of the Twentieth century into seven periods: The first period lasted from 1900 until August 1914. This was a period of relative price stability. All major European countries and many non-European countries were on the gold standard. Weaker economies tied their currency to silver. This period showed modest rates of inflation throughout the world and a large degree of stability on foreign exchange markets between currencies. The next period, from 1914 until 1924, was a period of instability, inflation, and hyperinflation. Within days of the outbreak of World War I, all countries had left the Gold Standard.